I shared my perspectives on various service provider firms many times over the years in blogs, especially at times of industry consolidation, or when new technologies and business models impact the market, as economic cycles ebb and flow, and as relationships and contracts change because of new expectations of the providers’ clients. My intent in these observations is to help enterprise clients understand how trends can affect their decision-making regarding third-party services. I now want to share my updated opinion on a service provider firm that I have closely monitored since its CEO changed in September 2019.
The third-party services industry is in the midst of a fundamental change as it pivots from building and supporting legacy systems to focusing on modernizing legacy systems and service providers develop and support their clients’ journey into the new cloud-based digital future. This headlong rush to the future and the greener pastures that it represents poses significant challenges to firms that have large legacy estates that need to be sustained and nurtured.
The DXC story
DXC Technology is a Fortune 200 global IT services company formed in 2017 when Hewlett Packard Enterprise Company (HPE) spun off its Enterprise Services business and merged it with Computer Sciences Corporation (CSC).
With more than 130,000 employees and operations in over 70 countries, DXC has a customer portfolio of nearly half of the global Fortune 500 and assists them with a wide variety of services.
Despite these impressive credentials, DXC faced an unsure future. The bulk of DXC business was in supporting legacy systems and infrastructure, and these workloads were viewed as likely to rapidly shrink as its customers modernized their systems and migrated to cloud platforms.
As a result, the leadership team adopted the prevailing industry view that the appropriate strategy was to cut costs as quickly as possible to ensure that the firm removed cost faster than revenue ran off to ensure profitability. They also complimented this strategy by separating the more attractive components of the business by selling or spinning them off. I recently wrote a blog outlining this approach and dubbed this strategy the “harvester” strategy.
By September 2019, this strategy had left DXC with negative growth, poor customer satisfaction, and accelerating customer flight. Unsurprisingly, this also resulted in plunging employee satisfaction, with the CEO having a Glassdoor rating of 35% and high levels of employee attrition. At this point, the DXC board decided to turn in a new direction and brought in Mike Salvino as its CEO. Earlier in his career, Salvino faced a similar dilemma when he led Accenture’s BPO Operations and successfully led that business to five years of double-digit growth.
As I said in my column in Forbes in September 2019, my perception was that Salvino faced a difficult journey to turn around DXC. He would need to transform the firm’s service offerings along with its go-to-market and account-management structures; and each one of those factors was formidable, let alone all of them. I also believed it would require rapidly evolving the culture and morale, which had been brutalized through years of relentless cost take-out.
Success through investment
Today, it is evident that DXC is emerging from a top-to-bottom transformation. This new strategy acknowledges that DXC can remain relevant to its customers. DXC services are important systems and is in a strong position to provide additional work in enhancing these systems, and provide additional services. This relevance gives it an opportunity to grow rather than continue to shrink.
The approach Salvino took at Accenture and is replicating at DXC is contrarian to the perceived industry wisdom on which most service providers still rely. That perceived wisdom is what I described in prior blogs as a “harvester” strategy for their business. This mindset is present in services for legacy estates; it focuses on taking out costs quickly and minimizing investment in services. This operational mindset affects the services clients can expect.
In contrast, Salvino takes an “investor” approach in how DXC transformed its services. In addition to providing cloud and digital services, DXC saw a need in the market for services for managing mission-critical technology that is too risky to move to the cloud because it first needs to be transformed. Transforming legacy applications can take years because the applications need to evolve over time to align with operational changes. Those applications have tentacles that touch hundreds of other applications and manage core operational data; therefore, companies still need to access their data in those legacy applications.
An “investor” service provider, such as DXC, invests in legacy capabilities, as well as attracting, nurturing, and rewarding talent. It takes the view that many applications will persist in their legacy state for many years, and some may never transition to the cloud.
A key component of transforming DXC’s services using an investor approach was for Salvino to bring in a new leadership team of executives, many of whom he had worked with at other firms. He also put out the “fire” of low employee morale by implementing a “people-first” strategy. As a result, employee engagement increased 16% from 2019 through 2021. The firm won several awards in categories such as best place to work or best employer.
I watched as challenges for Salvino and DXC came from many fronts since 2019. Salvino also faced the challenge of how to pay for the firm’s transformation and creation of the new “investor” thesis. He divested two businesses to restructure DXC’s debt, which also gave him the funds to resolve shareholder issues and fund the transformation. He also managed through an unsolicited takeover attempt by a competitor – all while modernizing the firm’s capabilities and offerings and delivering services to clients going that were going through their own digital transformation.
By the end of 2022, DXC will have completed its initiatives to shift from its harvester posture to an investor posture. The focus now is to nurture existing clients, helping them extend the life of their legacy estates while using this position of relevance to lean in on other growth opportunities.
This contrarian position still carries risk for DXC. There is little doubt that there is substantial industry momentum to modernize workloads and migrate as much as possible into the cloud and that this momentum hangs like Damocles’ sword over firms like DXC with a large portfolio of legacy work.
That said, it is also apparent that not all workloads will migrate quickly and that all workloads that don’t migrate will need ongoing investment. It is also likely that a firm such as DXC that takes up the mantle of the “investor” approach to services will be rewarded with other growth opportunities as it leverages its specific client relationship and knowledge.
Salvino’s “investor” bet appears to be paying off as there is no question that DXC is in a better place than it was before he became CEO. His next step is to get DXC to consistently grow; and for the sake of its clients and the broader industry, we wish the firm well. We will continue monitoring the firm’s progress. Time will tell how bright a place in the sun DXC’s strategies will create. But there is no doubt that DXC, its clients, investors, and the broader services industry will be better off with an “investor” firm in the marketplace.